Key Highlights

● Core FFO per share edged up to $4.34 despite Depreciation and integration costs.

● Same-store Revenue and NOI rose about half a percent, with lower customer churn.

● The company now operates more than 4,700 self-storage sites.

● Full-year core FFO per share guidance rose by 10 cents at the midpoint.

Public Storage (NYSE:PSA) reported third quarter results on October 20-sixth that were dominated by size. In a span of roughly six weeks during and just after the quarter, the self-storage owner closed an all-stock combination with National Storage Affiliates and acquired the Canadian Business known as PS Canada, adding hundreds of sites to a portfolio that already ranked first in the industry. The company raised its full-year guidance in the same release, and Chief Executive Tom Boyle said the quarter was better than expected.

The numbers had two layers. At the level of the established same-store portfolio, revenue and NOI rose by about half a percent, occupancy edged up and the company described lower customer churn. At the level of the whole company, net Earnings Per Share fell sharply from the prior year because of higher depreciation on newly acquired buildings and over $100 million of transaction and integration expense, while core FFO per share grew slightly.

What happened to earnings in the quarter?

Net earnings per diluted share were $1.69, compared with $2.62 a year earlier, a decline of roughly 35%. Total net earnings were about $378 million versus about $515 million. Two items explain most of the gap: depreciation rose to about $413 million from about $290 million, and transaction and integration costs added about $115 million.

Offsetting those items were a gain of about $27 million on the sale of real estate and a currency gain near $10 million. Total revenues rose to about $1.37 billion from about $1.22 billion, an increase of over 11%, helped by the acquired properties. Over the first nine months, net earnings per share were up by close to 8%.

What does core FFO say about the underlying business?

Core FFO per diluted share was $4.34 against $4.31, a gain of under 1%. Core FFO excludes real estate depreciation, gains and losses on property sales and one-time costs like Merger expenses, so it shows how the combined operation is generating cash before such items. In dollar terms, core FFO allocable to common shares and units was about $823 million, compared with about $760 million.

The small per-share gain reflects a larger share count, because the National Storage Affiliates combination was paid for in stock and the company also raised Equity in the market. Funds available for distribution, a stricter cash measure that deducts Capital spending, were about $689 million, lower than about $718 million a year earlier.

How did the same-store portfolio perform?

The same-store group covers about 2,750 facilities representing about 71% of U.S. consolidated rentable square footage. Revenue for the quarter rose by half a percent to about $1 billion, and NOI rose by the same proportion to about $769 million. Over nine months, same-store revenue was flat and NOI declined by about half a percent, so the quarter marks an improvement against the trend.

Average occupancy was 92.2%, up three tenths of a point, though the period-end figure was 90.4%, up by one tenth of a point. Realized rent per occupied square foot was $22.29, up 0.2%, while annual contract rent per occupied square foot was higher by 1.2%, a gap that points to room for realized rents to move up if customers continue to accept increases.

Why is customer churn getting so much attention?

Ayash Basu, the chief revenue and Marketing officer, attributed the improvement in same-store revenue to lower customer churn, higher occupancy and strong move-in rates. Churn, the share of customers who leave in a period, determines how much marketing and discounting the company must do to refill units. When people stay longer, the company can raise rents on existing customers gradually while spending less to attract new ones.

The cost side shows the other half. Same-store direct operating costs rose by about 2%, led by repairs and maintenance, up more than 17%, and marketing, up about 12.5%, while property taxes fell slightly. Gross Margin before indirect costs was about 78%, just below the prior year. In other words, a modest revenue gain was partly spent on keeping buildings in good shape and on advertising.

What did the company acquire, and how big is the portfolio now?

National Storage Affiliates closed on July 20-second in an all-stock deal, producing a combined network of more than 4,500 locations and more than 327 million operating square feet. Management expects between $110 million and $130 million of annual run-rate synergies within three to four years. PS Canada closed on September first for about $1.2 billion U.S. dollars including assumed debt, covering 68 properties and about 5.3 million square feet.

The company also acquired 25 other facilities for about $258 million during the quarter. Year to date, including activity after the quarter, it has acquired or agreed to acquire 65 facilities for about $713 million. In total the portfolio stands at about 4,764 self-storage facilities across 42 states, Puerto Rico and Canada, and the company owns a 35% stake in Shurgard Self Storage, which operates in seven Western European countries.

How were the deals paid for?

Chief Financial Officer Joe Fisher said the company executed a significant Capital Markets program this year that fully funded both acquisitions. Year to date, about $6.2 billion of Debt was raised and about $6 billion of common shares and Partnership units were issued or committed, including forward sale agreements for roughly 1.23 million shares at a weighted average of $326.51, expected to generate about $400 million.

Debt included a first public offering in Canada, Canadian dollar notes of $400 million due in the early part of the next decade at 4.54%, and $900 million of senior notes with an effective rate of 4.85% after hedging. As Infrastructure and Real Estate Stocks companies go, the pairing of stock issuance with long-dated, highly rated, long-dated debt is a familiar way to fund large property deals without stretching Leverage too far.

What do the leverage and Credit ratios show?

Total indebtedness was about $12.2 billion, with about $650 million maturing in the fourth quarter. Net debt to EBITDA rose to three point four times from three point zero times, and net debt plus preferred stock to EBITDA rose to four point seven times from four point two times. Coverage of fixed charges by EBITDA fell to six point three times from six point eight times, and the weighted average Interest Rate climbed to 3.6% from 3%.

Moody's and S&P kept their single-A category ratings unchanged, and Liquidity was about $4.1 billion. Total Assets reached about $29 billion, and Goodwill and intangibles grew to about $1.36 billion from about $252 million at the end of last year, a direct result of Acquisition accounting.

What changed in the guidance for Public Storage?

Core FFO per share guidance for the year was raised to between $16.90 and $17.10, from $16.75 to $17.05, lifting the midpoint by $0.10. Same-store revenue growth guidance rose to a range of zero to a half percent, while same-store expense growth guidance was cut to between one and a half and 2.5%. Same-store NOI growth is now expected between negative 0.8% and positive 0.2%.

Non-same-store NOI guidance rose to between $355 million and $363 million from $343 million to $357 million. The overall pattern shows management seeing slightly better revenue and slightly lower cost than it expected at the start of the quarter, though same-store NOI is still a flat number at best.

What is PS Four, and how does it relate to the deals?

Boyle described the closings as an important advancement of what the company calls its PS Four strategy. The label refers to the company's operating platform for pricing, marketing and customer service, which management intends to apply to a larger base of properties, including those acquired from others. The acquired facilities were mostly in lease-up, with revenue growing about 91% and NOI about 92% in the non-same-store group during the quarter.

That jump reflects the addition of new properties more than organic gains. The more relevant measure will be whether acquired locations reach the occupancy and rent levels of the legacy portfolio, which management has framed as the source of the synergies. Integration expense will continue to appear in net earnings until the work is finished.

Synergy estimates in acquisitions of this kind usually come from combining overhead, contracting services at larger scale, and applying a single pricing and marketing approach across overlapping markets. The company gave a run-rate figure and a time frame of three to four years, which means that the full benefit will not appear in the next few reports. Readers comparing quarters should therefore expect integration costs and synergy gains to be spread unevenly across the periods ahead, and should look to the non-same-store and same-store tables to separate acquired results from the established portfolio.

The scale of the equity raised also matters for per-share arithmetic. Issuing roughly $6 billion of common shares and units spreads core FFO across more owners, so total core FFO can rise by several percent, as it did here, while the per-share figure moves by far less. Forward sale agreements, which lock in a price now and deliver shares later, let the company time the receipt of cash to the closing of acquisitions and reduce the gap during which new money sits idle on the balance sheet.

What else is in the pipeline: development, lending and management?

Development remains modest. Four new facilities and several expansions opened in the first nine months, adding half a million square feet for about $84 million, and the total pipeline is about $789 million with roughly $467 million left to spend over 18 to 24 months. The company also originated about $34 million of bridge loans at an average rate of 7.7%, and its notes receivable total about $445 million at a 9% average rate.

The release described a mezzanine Loan of $237 million to a joint venture tied to the National Storage Affiliates transaction at 10.22%. Third-party management covers about 493 facilities, a net gain of 31 in the quarter, with 70 more under construction. These lines are small beside rental revenue but add fees and a pipeline of possible later acquisitions.

Where do the shares trade, and what is the Dividend picture?

Public Storage trades on the New York Stock Exchange and is a member of the S&P 500. The release does not list a per-share dividend declared for the quarter. The only dividend figure it gives is dividends and distributions payable of about $583 million at the end of September, up from under $2 million at year end, which shows the timing of when payments are accrued rather than a change in the rate.

The company also noted that it published its annual sustainability report and was certified as a Great Place to Work for the fifth consecutive year.

What should readers watch from here for Public Storage?

The fourth quarter will be the first full period including both acquisitions, so the combined figures will look different from this report. Readers can follow whether same-store revenue growth stays positive, whether integration costs fall away and whether the synergy estimate is reaffirmed or revised. The Maturity of the roughly $650 million of debt due in the quarter will also be a data point on refinancing costs.

Self-storage Demand is tied to household moves, housing turnover and small business activity, factors that were weak across the industry for some time.